Yeah but no but yeah: Are interest rates still effective?
It has taken a hot minute and a lot of rate rises to slow down inflation. What this actually tells us about the effectiveness of interest rates isn't so clear cut.
There’s no denying the public is angry about the cost of living right now. It’s in the politics, the polls and will undoubtedly be part of Christmas Day dinner table discussions. Mortgage-holders (and those paying their rent) are particularly frustrated to see living expenses continue to rise while interest rates, in the name of slowing this inflation, also keep going up.
The Reserve Bank's rate rise in November hit consumer confidence and there’s a collective clenching for next week’s December decision. The vast majority of economists expect rates to be on hold for this last meeting of the year, including on the latest Finder survey of almost 40 experts. For next year economists are split on what will happen, meaning 4.35% may or may not be as bad as it gets.
Even so, it’s possible the inflation fight is nearly over. Latest retail figures are soft and this week’s monthly CPI indicator came in below expectations. Even the OECD reckons we’ll see inflation slowing.
But it has been a difficult 18 month slog, so it’s logical to ask why it has taken this long for interest rates to work. And if interest rates no longer do as good a job dealing with inflation as they used to?
